Talk to us.

What Do Venture Capital Investors Look for in an Entrepreneur?

Len Batterson, January 4, 2022

Passion, Confidence, AND Sound Objective Judgment

For venture capital investors, news of Theranos founder Elizabeth Holmes' guilty verdict in her federal investor fraud case highlights the critical importance of the entrepreneur behind the startup venture seeking their funds. Experienced VCs will tell you that "the jockey" riding "the startup horse" can be as crucial as the venture itself.

So what do these VCs look for in an entrepreneur?

What they look for reflects the essence of the venture capital startup world. Entrepreneurs and their venture capital investors reach far. The truly successful ones – both entrepreneurs and their venture capital investors – reach VERY far. Venture capital is about going where nobody else has yet arrived. The entrepreneur's quest for a dramatic and meaningful breakthrough demands faith, passion, and confidence. 

It takes faith for the entrepreneur to dream what others might regard as the impossible dream and to believe they can make that dream reality.

It takes passion for remaining committed through the inevitable obstacles and mishaps along the way. And that passion must continue to burn bright as the entrepreneur's baby progresses to sustain investor commitment and then customer engagement and commitment. 

The successful entrepreneur must have confidence – an authentic belief that they are up to the task and can make it happen – and exude that spirit credibly to motivate others on the team to follow the entrepreneur on that quest.  

But sound, objective judgment is also essential. Faith, passion, and confidence do NOT mean adhering to a plan that is not working, ignoring reality, and employing exaggeration. Unfortunately, some entrepreneurs may feel compelled to exaggerate the progress of their projects to continue to raise needed capital at higher and higher valuations. The temptation can be significant. But it's not the path to success.

To be clear, we are not suggesting that Elizabeth Holmes set out on her quest intending to mislead and defraud. On the contrary, it appears that she genuinely believed she could make her vision of revolutionizing blood testing a reality. 

But as chronicled in the media, she ultimately fell victim to the temptation to exaggerate progress to continue raising capital at higher and higher valuations, first over-selling her company, Theranos, to investors, and then to distributor partners such as Walgreen's. In Silicon Valley talk, Holmes "faked it before she made it." While many software apps may release beta versions with glitches still needing fixes, a practice recognized and broadly accepted by the market; you can't do that with blood tests and lives at stake.  

How might Holmes have raised the needed capital without faking it?

Admittedly, it would not have been as easy as the path she fell into. Still, it can be done -- in part by having visible milestones, presenting actual data on the journey to those milestones, and honestly going through required FDA regulatory processes. 

If what she was trying to do was not working, she should have stepped back to modify and fix the problems. If necessary, she could even have started over and done it differently or perhaps changed her quest into one somewhat less ambitious but still significant and market-worthy.   

Thinking of ABBA's hit song "I Still Have Faith in You," Holmes appears to have fallen victim to a critical line of lyrics: "Do I have it in me? / I believe it is in there." It is often better for the entrepreneur to have faith in themselves, "I believe it is in me," rather than faith that "it is in there." "THERE" may be on the wrong track. The confidence to believe in me opens the space to do it differently and hopefully more successfully. 

In some cases, this might mean modest adjustments and refinements, but in other cases could lead even to a rejection of a core perspective and adoption of a very different one or to an amalgam of complementary perspectives. The legendary mathematician Alexandre Grothendieck argued in his book 'Sowing and Reaping.'

“A perspective is by nature limited. It offers us one single version of a landscape. Once when complementary views of the same reality combine are we capable of achieving fuller access to the reality of things. The more complex the object we are attempting to apprehend, the more important it is to have different sets of eyes, so that these rays of light converge, and we can see the One through the many. That is the nature of true vison: it brings together already known points of view and others hitherto unknown, allowing us to understand that all are, in actuality, part of the same thing.” 

Believing it is all in me allows the entrepreneur to bring together already known points of view and then see others hitherto unknown in one true unity.

Reaching where nobody else has yet arrived is a risky mission. Most such missions fail. But top entrepreneurs succeed at a greater rate than lesser ones and sometimes in a massive way. Often that is based on significant strategic pivots along the way, as the entrepreneur learns more, including where they may have been on the wrong track before. That's the venture capital success model.

Successful venture capital investors invest in the person as much or more than in the immediate dream.

The successful entrepreneur often wins the second or third time around, learning from previous efforts. Many successful entrepreneurial ventures are complete restarts or re-do's. Holmes' fatal flaw appears to have been not having the objectivity to modify or even halt her immediate quest and then if required, the self-confidence and courage to undertake a re-do.  

The legendary Steve Jobs is an excellent example of sound objective judgment to supplement his faith and passion, along with the confidence to recognize when he was off course and make significant course corrections. Jobs' huge Apple success followed some earlier failures. However, he learned from those experiences and had the confidence and courage to dust himself off and try again, conceiving and executing massive strategic pivots. Elizabeth Holmes should have followed that Steve Jobs example rather than just copying his black turtleneck attire.

We would love to hear your thoughts too. Talk to us